Former Fed chair warns of new financial crisis

Former Fed chair warns of new financial crisis

By
Nick Beams

26 October 2018

In the midst of increasing volatility on global financial markets, the former chair of the US Federal Reserve, Janet Yellen, has pointed to a potential source of major instability with “systemic risks.”

In an interview with the Financial Times to be published today, Yellen said there had been a “huge deterioration” in the standards of bank lending to corporations as a result of moves to lessen regulation.

Her focus of concern is so-called leveraged loans which are provided to companies with weaker credit ratings—a market which amounts to $1.3 trillion in the US.

“I am worried about the systemic risks associated with these loans,” she said. “There has been a huge deterioration in standards; covenants have been loosened in leveraged lending.”

In remarks unprecedented for a former central banker, Yellen told the newspaper that the lessons of the financial crash of 2008 were being forgotten as banks were pushing to water down regulations that had been put in place since then.

“There are a lot of weaknesses in the system, and instead of looking to remedy those weaknesses I feel things have turned in a very deregulatory direction.”

Yellen’s remarks echo views expressed during the meeting of the Fed’s Open Market Committee at its last meeting in September. According to the minutes published earlier this month: “Some participants commented about the continued growth in leveraged loans, the loosening of terms and standards on these loans, or the growth of this activity in the nonbank sector as reasons to be mindful of vulnerabilities and possible risks to financial stability.”

The Fed had pointed to the rise of leveraged loans to highly indebted companies in previous…